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Midterm

TEST 02 2011 WITNER

6 Pages
236 Views

Department
Economics
Course Code
ECO370Y5
Professor
Robert Barber

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10 QUESTION 3:
(a) Identify three (3) factors that account for the high level of
executive compensation?
i. Long term contract as contrasted with short term
contracts with a view to discouraging early departure by
high paid executives ± especially if the negative impacts
of their decisions have a time lag of several years
ii. Links with corporate performance ± for example, reward
stock appreciation with stock options ± deferred
compensation in general to reduce the incentive to make
short run decisions that could prove costly in the long run
iii. Strategic role of the executive ± for example, executives
are increasingly hired from outside the organization ±
sometimes due to their relationship with strategic inputs
and even rivals in the market
[Milgrom and Roberts, pp. 432 ± 433]
(b) Identify three (3) factors that account for the high level of
manager compensation explaining what factors distinguish it
from executive compensation?
Long term contracts as contrasted with short term contracts
not as common in large part because their decisions not as
major in some cases
Links with corporate performance ± for example, reward
stock appreciation with stock options ± like executives
Strategic role of the executive may not apply as frequently in
WKHPDQDJHUVFDVH- but there are exceptions ± especially if
the managers have some unique skill
25 QUESTION 4: Suppose firm M manufactures a product using its own
LQSXWDQGDVSHFLDOL]HGLQSXWIURPILUP%7KHFRVWRILQYHVWLQJLQ0VLQSXW
to M is C(i) = i2/2. ThHFRVWRILQYHVWLQJLQ%VLQSXWWR%LV&H H2/2 ± 4e.
Let R(i) = 10i represent the revenue earned by M if M and B operate under
one integrated organization.
Tat-kei:
It is OK if students show the first order conditions in (a) instead of (b) ±
since that is a necessary step ± so it might make more sense to mark (a)
and (b) together ± out of 10 marks
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